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IRS strikes out against Steinbrenner

In a family trust case, the U.S. District Court for the Middle
District of Florida found in favor of the son of the New York Yankees'
late owner, George Steinbrenner, by ruling that a claim for refund was
timely filed and that the date of payment was the correct starting
date for the statute of limitation. The court found that tax
settlements made at the partnership level do not remain partnership
items as they flow to other succeeding entities and mingle with other
transactions and tax decisions.

Harold and Christina Steinbrenner were beneficiaries of a family
trust that was an indirect partner in YankeeNets LLC through another
partner, Yankees Holdings LP. In 2006, YankeeNets, Yankees Holdings,
and the IRS settled a tax dispute over the tax treatment of a 2001
YankeeNets asset sale as a long-term capital gain. As part of the
settlement, Yankees Holdings had to treat part of the long-term
capital gain as ordinary income. The IRS formally accepted the
settlement on March 1, 2007. In February 2008 the IRS adjusted
YankeeNets’ partnership income for 2001 and 2002 and disallowed two
deductions. A large net loss flowed through to the family trust for
2002. The IRS disallowed the distribution of the loss to the
beneficiaries for 2002.

On Feb. 26, 2008, the IRS notified the Steinbrenners that they owed
more than $500,000 in additional taxes for 2001. The additional taxes
were paid in two payments in June and October 2008. The claim of
refund in this case involves these two payments.

On June 3, 2009, the family trust amended the 2001 return and
elected to carry back the net loss to that year that had been
disallowed for distribution in 2002. On Aug. 14, 2009, the
Steinbrenners claimed a refund from 2001 of about $585,000. In late
December 2009 the IRS paid them a refund of $670,494 in tax and
interest but then sued to recover it, stating that the refund claim
had not been timely filed.

The primary issue was which statute of limitation applied—the
general rules in Sec.
6511(a) or the more specific rules in Sec. 6511(g) for partnership
items. If Sec. 6511(a) was correct, the two-year limitation window
began on the date the tax was paid. If Sec. 6511(g) applied, then a
claim of refund must have been filed two years from the date of the
settlement (Sec.
6230(c)(2)(B)(i)). The settlement was entered into on March 1,
2007, so the Aug. 14, 2009, refund claim was late under Sec.
6230(c)(2)(B)(i). However, using the June and October 2008 payment
dates as the starting point, the refund claim was well within the
two-year time frame.

Sec. 6511(g) applies to any tax that is, or is attributable to, a
partnership item. The trustee’s carryback of loss was not a
partnership item under Sec.
6231(a)(3) since it was not “required to be taken into account for
the partnership’s taxable year,” the court held. The IRS argued,
however, that it was attributable to a partnership item, because “but
for” the settlement agreement with Yankees Holdings (which determined
the amount of partnership loss for YankeeNets in 2002) the overpayment
of tax and refund claim would have never occurred.

The court rejected this argument as well, finding that there was no
straight line of causation or attribution between the partnership item
and the Steinbrenners’ refund. The chain of causation was interrupted,
the court held, by the IRS’s independent action in denying
distribution of loss by the trustee for 2002 and because the trustee
had a choice among alternative courses of action (whether, for
example, to contest the IRS’s determination for 2002 or carry back the
loss to 2001 or to another year).

Next, the court considered the IRS’s alternative argument that the
carryback was an “affected item” that was attributable to a
partnership item. The court never explicitly decided whether the
trustee’s loss carryback was an affected item, because the Taxpayer
Relief Act of 1997, P.L. 105-34, removed the term “affected
item” from Sec. 6230(d)(6). However, it determined that exception to
the regular refund procedures in Secs. 6230(d)(6) and 6511(g) did not
apply to affected items.

Finally, the court noted that a family trust beneficiary, not a
partner, was claiming the refund. The beneficiary was not a party to
the settlement, and the net loss carryback was not attributable to the
Yankees Holdings settlement. The two-year settlement date limitation
of Sec. 6230(c)(1)(B) was not applicable on its face or on the facts
and circumstances of this action, the court held.

By Sharon Burnett, CPA, Ph.D., associate
professor of accounting, and Darlene Pulliam, CPA,
Ph.D., Regents Professor and McCray Professor of
Accounting, both of the College of Business, West Texas A&M
University, Canyon, Texas.

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